Tag Archives: strategic defaulters

By Percentage, The Rich Are Now The Number 1 Mortgage Defaulters

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According to this New York Times article: (Click here to read), the following is taking place:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

The article goes on to say that only 1 in 12 below the million dollar mark is deliquent!

Okay, so perhaps the rich aren’t out on the streets…  In fact, usually it’s a 2nd home or a rental property that they are delinquent with the payment…

The article states that the Rich are more ruthless.  Actually first, I’m sure if “us, less than rich folks” had a 2nd house or rental property, we would consider unloading it too, especially if we were losing money on it. 

Second, I think since the government is attacking this social class, they no longer feel obligated to do what is best for the economy or government.  After all, they are being secretly or blatantly (depending on your viewpoint), attacked from the government.  So why care, since they are being view as the bad guys anyway. 

Mostly, I think they see it as a bad investment that no longer makes sense though.

I initially was going to write this post around the fact that strategic defaulters are bad, and I would take the high road and stick it out.  But, since the 2nd home or rental property is really an investment…  Now, I’m not so sure!  I would like to think I’d do the right thing, but they are losing money on these investment, and the government is kicking them while they are losing that money…

Readers, what would you do if you have a 2nd home or rental property in a place like Las Vegas (where the value of homes have practically halved)?

-MR

Loss of Honor, Walking Away From Your Mortgage

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I’ve had this title “Loss of Honor, Walking Away From Your Mortgage” stored in draft mode for over a month.  I hesitated in writing it because I was torn between how the government was treating us (practically giving money way to first time home buyers) and that fact that to walk away from your mortgage is wrong.

Why is it wrong you say?

Because you entered a contract with the other entity.  A contract is a contract and without it, American isn’t quite the same place.  What if your house lost 40% of it value, you might ask?  Well, I think that bites, but you still have a contract with your lender.   And the right thing to do would be to continue to make your payment as planned.  Besides, there is a good chance that your house might get some of it’s value back.  From recent readings, house prices are starting to appreciate a bit.

As you can tell, I’m up on the old soapbox about this voicing my opinion, but I kind of feel like a hypocrite!  I now own my house outright, so I no long have a mortgage payment, but that’s not why I feel like a hypocrite!

You see a very close friend has just did exactly what I’m saying not to do…  He bought a bigger, better house, and walked away from the mortgage on the other house.  He didn’t tell me directly, but his dad was upset and let it leak out to me.  Needless to say, I was shocked! 

Such an action that my friend preformed is called a “Strategic Default“.  This is where a person can still afford to pay a mortgage, but instead walks away.

My view of my friend has already changed for the worse, I find that I don’t want to hang out with him, and make up excuses as to why we can’t hang out.

I hope that Strategic Defaulters realize that doing such a deed, will tarnish their image, and they may even lose friends, or have their friendships reduced (like I did).

What would you do if a close friend or relative did such an action?

-MR

Walking Away From Debt

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Rich defaulting on their mortgages

I read an interesting article on msn.com today (Click Here for the msn article) about the rich walking away from their mortgages.  Some are even double dipping, they stop paying on their mortgage and if they have a line of credit, sometimes they pull all of that money out too.  The msn article calls these defaults, “strategic defaults”.  In California, the strategic default cases increased by 68 times from 2005 to 2008(not percent! times… WOW)

What if you lived in an area that had a financial perfect storm kind of occurrence?

Okay, what if you do live in one of the real expensive areas of the country (parts of California,  Florida, etc), where the value of your house has lost more than half it’s value?  What if you find a house that is a bigger better house than your, and it was in foreclosure in a great area, and discounted by 50%?  So now you have the possibility where you can buy a bigger better house for less money than you paid for yours…  And one that will probably double in 5 years when all of this mess is behind us (hopefully…).  That can be pretty tempting!

Hmmm, the financial logic is:  I’ll buy that bigger house in the more prestigious area that was foreclosed on for half price it was originally, then let my house go into foreclosure.  If after 5 or so years, the house market recovers, they gain on the uptick potentially doubling their money. And if the house doesn’t appreciate that quickly, they are still in a better area than before, possible with a better school system.  Only the banks lose out, wow, that is tough.  I live in an area where the houses didn’t fall much in value, so the people in my area are not presented with that immediate temptation.

Depending on the amount saved in such a transaction, that could be a big temptation.  I don’t know if the damage to your reputation would be worth that… but perhaps it is, it’s a hard choice.  In the past, there would be consequences for skipping out on your debt like that.  I bet if you were in a different country, that wouldn’t be allowed.  But in our country, most of the blame seems to be directed towards the banking system.  We the people, were just innocent lambs lead by the noses to be slaughtered.   I think the government underestimates some of us…  Some people, (probably most of use reading financial blogs) feel like we have been getting the short end of the stick lately, with government programs that benefit just a few of us, and not equally distributed like it should be.

While I don’t agree with the tactic above, I can see the financial logic and temptation that is presented and if you’re upset with the banking system or government…  Hmmm…

 

For most areas of the country though, below are some things to consider.

Money Reasons not to walk away from your mortgage:

  • Damage will be done to your credit score
  • Banks will be cautious to loan you money in the future
  • Eventually, the value of your house will rise again
  • You’ll regret leaving, especially if you hurt your neighborhood
  • You’ll have a reputation as a non-trustworthy individual, forever…
  • People will pity you and think that you can’t control your money
  • Ethics!

 

Sad, I hope this trend of strategic defaults, doesn’t catch on much more than it has, else wise, we might have more systemic risk problems down the road.  Another possibility might be longer stagnation in the housing market…

-D